Sneak Peek: Summer Doldrums Shouldn't Burn 2Q Performance

Cable’s getting ready for its traditionally stagnant 2Q, a period marked by decreased sub adds and lower take rates on advanced services as students and snowbirds disconnect for the summer. Analysts, however, are used to such seasonality. Instead, a raft of recently released 2Q preview reports focus on the 2 hot button issues that have ops reaching for the Advil: How serious is the threat levied by DBS and the telcos? And what combination of services will transform cable stocks into a reliable investment opportunity? For starters, the DBS threat remains a clear and present danger to MSOs. Oppenheimer says it expects satellite will continue to win over the majority of new TV HHs, estimating that DirecTV [DTV] and EchoStar [DISH] will grow subs in 2Q by 640K combined, while seasonality will cause 64K net cable subs to churn off and over. Cable’s HH penetration will drop slightly from 68.9% to 68.6%, while DBS’s reach will jump from 20.9% to 21.4%, the firm projects. Comcast [CMCSA] may have the best strategy for fighting off the dishheads, according to Smith Barney analyst Niraj Gupta, who cites the MSO’s 2-year plan to broaden VOD content, pump up DVR service and exploit its local HD advantage. As is the case with other Tier I ops like Cox [COX] and Cablevision [CVC], Comcast is expected to report strong 2Q numbers and shouldn’t see much encroachment in its video markets by the RBOCs (even as SBC’s Dish Net bundle picked up 100K subs in the Q). According to UBS analyst Aryeh Bourkoff, while recent FTTH announcements from Verizon [VZ] have driven valuations to new lows, "the concerns are overdone, and the equity market is overly discounting the cable sector." Bourkoff says cable continues to hold a competitive advantage in its ability to offer a fully realized bundle, and also retains a key time- to-market advantage. — As for the sticky issue of stock performance, Morgan Stanley analyst Rich Bilotti argues that a long overdue rally could be in the stars. As free cash flow increases, cablers will be likely to adopt dividends or share repurchase programs, and as we all know, once 1 op tries something on for size, "competitive envy should drive the other companies to follow suit." — Reporting next week: Comcast and Time Warner (Wed), Cox (Thurs) and Insight [ICCI] (Fri).